How we can help demystify mortality for trustees

The issue

The ultimate cost of the pension promise will depend on how long your plan members live. However, judging that now in order to place a value on the benefit promise is tricky, as forecasting the life expectancy of plan members has a strong element of crystal ball gazing - it is very uncertain and subjective. Furthermore, the choice of assumption is becoming subject to increased scrutiny.

The solution

We aim to demystify mortality so you understand clearly what action you can take.  A plan for trustees selecting an appropriate assumption is below:

  • Understand the issues for selecting a mortality assumption and the regulatory framework in which you are working.

LCP provides both off-the-shelf briefing sessions, or tailored scheme specific training to fit trustee needs in order to gain the overview they require.

  • Analyse the key characteristics of your plan's membership that can be used to help predict current life expectancies.

LCP is able to help you analyse the key characteristics of your plan members so that a standard published mortality table can be calibrated to reflect the characteristics of your members.  Key methods LCP employs to do this include:

  • Deriving a profile of the membership based on the nature of each member's occupation.
  • Using postcodes to construct a profile of the membership based on the streets in which your members live.
  • Comparing the actual rates of mortality of your members over the last few years against standard tables.
  • Form a view on how these current life expectancies may change in the future due to, say, a cure for heart disease, trends in smoking habits or the impact of obesity.

Current wisdom is that rates of mortality will improve (ie fall so that there will be fewer deaths) due to a combination of factors, including medical advances and lifestyle changes - however, the degree of improvement and how long it will continue is a great unknown. There are many different models available, which we can illustrate.

  • Investigate the financial sensitivities of varying the assumption.

We believe that it is crucial to understand the impact of using different assumptions and to be aware of the implications if experience turns out to be different to that assumed. LCP has real-time, graphic based, tools to illustrate the impact on the projected benefit payments and financial consequences of adopting different assumptions.

  • Weigh up the options for mitigating the down side of longevity risk.

Dependent on trustees' tolerance to risk and the price they have to pay to mitigate it, considering de-risking options may be appropriate. 

The uncertainty surrounding members' future life expectancies represents a big financial risk within a pension scheme.  The last few years have seen innovative ideas being created to reduce this, and other risks. These range from simple benefit design changes through to transferring the risk to insurers.

LCP is well positioned to lead trustees through a de-risking process should it be appropriate.